Leonard v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 28 September 1937 |
| Docket Number | Docket No. 65805. |
| Parties | STEPHEN J. LEONARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
J. Donald Duncan, Esq., for the petitioner.
Dean P. Kimball, Esq., for the respondent.
This case involves an alleged income tax liability of petitioner for the year 1929 in the amount of $3,270.27. The deficiency arises from the proposed addition to the petitioner's taxable income for the year 1929 of:
(a) The sum of $17,723.89 reported by the United States Trust Co. of New York as capital gains and profits to a trust fund from the sale of bonds held as part of the trust corpus which was not distributable to the beneficiaries.
(b) The sum of $16,191.34 income of the aforesaid trust fund, consisting of dividends and interest received by the trustee and distributable to Adelaide Shanahan Leonard (the former wife of the petitioner) and the three children of the petitioner. Both of these sums were reported for income tax purposes by the United States Trust Co. of New York as trustee in the taxable year.
Respondent confessed error in including in petitioner's taxable income the capital gain reported by the trustee from the sale of capital assets of the trust. Therefore, the only question presented is the taxability of the $16,191.34.
FINDINGS OF FACT.
At the date of execution of the instruments hereinafter mentioned the petitioner, an individual residing in New York City, was worth approximately $2,000,000. He and his wife, Adelaide Shanahan Leonard, were then living separate and apart. Three children had been born of their marriage, two of whom, Stephanie and Craigh, were minors during the taxable year, and one of whom, Jeanne, became 21 years of age July 18, 1929.
Prior to the taxable year and on December 27, 1928, petitioner had been served with a summons in an action for absolute divorce instituted by his wife, Adelaide Shanahan Leonard.
Thereafter, and on June 4, 1929, the petitioner, his wife, and the United States Trust Co. of New York executed an agreement of trust wherein the United States Trust Co. was made trustee, and the petitioner, as grantor, contributed securities, stock, and cash of the then value of $650,000, listed as Exhibit A, to the trust agreement, as a trust fund, the net income therefrom to be paid to the beneficiaries therein named in equal monthly installments as far as practicable. The trust fund contained $400,000 principal amount of McCullough Oil Co. bonds which petitioner guaranteed as to principal and interest, and in case of default he agreed to substitute cash or securities in lieu thereof.
The grantor reserved the right to amend or revoke the trust instrument until delivery to the trustee of a copy of summons and complaint in a proceeding for divorce by the wife against the husband, and upon such delivery the right to amend or revoke was to be suspended until a certified copy of a final decree of divorce was delivered to the trustee, or a stipulation of attorneys that the divorce action had been discontinued or dismissed was delivered to the trustee. Upon delivery of a certified copy of final decree of divorce to the trustee, grantor's right to amend or revoke was to terminate and thereafter the trust was to be considered irrevocable so far as grantor was concerned. Upon discontinuance or dismissal of the divorce action, the right of revocation was to be in effect and the trust considered a revocable trust. Upon revocation the trust fund and accumulated income was to be fully restored to grantor.
From the net income of the trust during the life of the wife, $5,000 per year was to be paid by the trustee to each of the three named children, the minors' portion payable to the wife as natural guardian for the account of the minors during their minority. Should any child die during the life of the wife, such child's portion was payable to the wife during her life for her own separate use, the remaining net income of the trust to be paid to the wife "during her life to be used by her for her maintenance and support and in her sole discretion for the support, maintenance and education of the children by herself and grantor."
Upon the death of the wife the trust fund was to be divided into as many equal parts as there were then living children and deceased children of the wife by the grantor leaving issue. Each part was to constitute a separate trust fund for the benefit of each living child as life beneficiary and during the minority of each child, so much of the net income as the trustee deemed proper was to be used for the support, maintenance, and education of such minors. The unexpended net income was to be accumulated for such child's benefit upon reaching majority. Upon a child's attaining 21 years, the accumulations and the whole of the net income of such child's portion was to be paid that child in monthly payments during life, and upon the death of such beneficiary, whether before or after attaining 21 years, the principal, together with the accumulations thereon, was to be paid as such life beneficiary may have directed by will, or in default of such direction, to his or her issue surviving, and if no issue survived, then to the other descendants then living of the wife by the grantor, per stirpes, or if none, to the descendants of the grantor per stirpes.
Should any child die before the wife, having directed by will to whom the payment of his or her portion should be made, payment was to be made in accordance with such direction. In default of any such direction, payment was to be made to his or her issue then living, and if none were living at the time of the wife's death, then to the other descendants of the wife by the grantor, and, if no such other descendants, then to the descendants of grantor.
It was further provided that, notwithstanding any of the terms or provisions rendering the trust irrevocable after a certificate of final decree of divorce was delivered to the trustee, the trust agreement or any of its terms could be changed or amended during the life of the grantor with the consent of the wife and that nothing in the trust agreement should be decreed to vest any interest in the children prior to the death of the grantor or his wife and that no child should have the right to object to any change that might be made by the grantor with his wife's consent.
On the same day, June 4, 1929, a separation agreement was entered into, in which it is recited among other things:
Whereas the parties hereto desire to enter into an agreement by the terms of which they may hereafter continue to live separate and apart and by the terms of which proper and reasonable provision shall be made for the maintenance and support of the party of the first part wife and the maintenance, support and custody of the aforesaid two daughters and son, and
Whereas, by separate trust agreement bearing even date herewith by and between second party as grantor and United States Trust Co. of New York, of 25 Wall Street, Borough of Manhattan, City and State of New York, as trustee, some provision has been made by the second party for the maintenance and support of the first party and the aforesaid two daughters and son, which trust agreement is incorporated herein by reference thereto as though fully and at length set forth and is marked Exhibit A.
Summarized, so far as material here, the separation agreement states that the second party (husband) has by the trust agreement established a trust fund with principal amount of $400,000 McCullough Oil Co. 3-year 6 percent first mortgage sinking fund gold bonds of March 1, 1929, and $250,000 cash or other securities, the net income of which trust is payable to the first party (wife) subject to a prior charge of $15,000 in favor of the three children of the parties. That in addition to the establishment of the trust fund the wife received in the past by way of gifts from the husband personal property then of the value of $350,000 which was acknowledged to have a present income value of at least $15,000 and the wife agreed that her income would be at least $30,000 a year from the aggregate net income of the property given her by her husband and from the trust fund, subject only to the necessity of providing therefrom for her support and the support, maintenance, and education of the three children.
The petitioner further agreed to pay his wife the sum of $35,000 per year, $10,000 payable on the 15th day of June in each year, beginning with the year 1929, and $25,000 payable in equal monthly payments so far as arithmetically possible on the first of each month, beginning with the month of July 1929. Such payments in the aggregate sum of $35,000 were to be made by the husband to the wife during her life, provided his circumstances and ability to pay continued to be as good or better than of that date, making the aggregate net income receivable by the wife to be used by her for her maintenance and support and that of the three children approximately $65,000 per year from property represented by gifts received from the husband, the trust fund, and the yearly payment under the separation agreement. He further agreed to pay all the extraordinary medical expenses of the wife and children until each child reached the age of 25 years. Either party had the right to apply to the court for readjustment of the $35,000 annual payment as ability to pay varied, but in no case to exceed that amount.
In addition to the $650,000 property and cash contributed to the trust fund by grantor, the wife deposited three insurance policies, each of $100,000, in the trust fund, on the life of the husband in which she was the beneficiary. Premiums were to be paid by the wife, and in case of default, grantor could pay them and deduct the amount so paid from the payments due her. The furniture and personal property in a dwelling on Long Island and the city apartment then occupied by the...
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